Magazine

Online Extra: The Sharing Economy

June 19, 2005

As a professor at Yale Law School, Yochai Benkler doesn't seem like a prime candidate to rewrite the field of economics. But in a couple of papers, most recently "Sharing Nicely: On Shareable Goods and the Emergence of Sharing as a Modality of Economic Production," he suggests that the Internet and cheap computers are spurring a new method of producing economic value besides the market and the traditional company. He calls it commons-based peer production.

Open-source software, song sharing, the volunteer-written online encyclopedia Wikipedia, and other activities, he contends, require neither traditional corporate oversight nor monetary incentives to create real value. And that's likely to both threaten some existing companies and create entirely new ones, as it has with search engine Google (GOOG) and Skype Technologies, a provider of free Internet phone service.

Benkler recently spoke with Robert D. Hof, BusinessWeek's Silicon Valley bureau chief, about how peer production works and what it will mean for corporations and the economy. Edited excerpts of their conversation follow:

Q: How did you conceive the notion of peer production from such seemingly disparate activities?

A: I had been looking at commons-based behaviors in unlicensed radio spectrum and in intellectual property, and their important role in innovation. I was uncomfortable with the notion that this was purely a phenomenon of software or musicians. That doesn't explain Wikipedia. That doesn't really explain Slashdot [the peer-written and -reviewed tech news site]. That doesn't explain why Google was so phenomenally successful.

Q: What qualities do those things have in common?

A: [They show that] the economic role of social behavior is increasing. It used to be that if you said, "Here, this is interesting, why don't you read this?" it was primarily social. When you take the exact same behavior and plug it into Google's Page Rank algorithm, you actually get a discrete economic output that increases welfare in the economy overall -- even though you continue to have a certain social interaction there as well.

Q: Why is peer production happening now, and what technologies are enabling it?

A: With the steam engine, the archetype of the Industrial Revolution, we moved to industries where the physical capital was relatively concentrated. You had to have financial capital in order to enable effective collaboration between individuals.

What we're seeing now is cheap processors, which put computation on our desktops and in our laps, cheap storage, and ubiquitous communications. It's this combination of a low-cost personal computer and the Internet...that allows this aggregation of behavior. Things that would normally just dissipate in the air as social gestures come to have some persistence as economic products. This departs radically from everything we've seen since the Industrial Revolution.

Q: How is the combination of these technologies turning that behavior into something economically valuable?

A: You can build platforms and tools that assume that what you're doing is facilitating sharing -- as opposed to producing a finished product to a consumer. Look at Skype. It has built a platform that allows us to share our PCs' excess capacity to produce connectivity. No one has built a network for Skype -- all the million or 2 million people online are contributing resources. There's no commercial transaction between us.

Just imagine trying to build a global voice-over-IP [VoIP] network. The cost would be unimaginable. The costs are unimaginable, except they're borne by a million or 2 million different people instead of by a company. It hasn't become less capital-intensive. The way in which it's financed has changed. It's user-capitalized networks.

Q: Does peer production challenge the market system as a whole?

A: I don't see a risk of that. At the end of the day, people have to put food on the table, and food won't be produced in this way. Cars won't be produced in this way. Buildings won't be produced in this way. Even novels won't be produced in this way.

There's a subcategory of things that can be produced in relatively fine-grained, modular units that are amenable to this production. It so happens that a lot of the most valuable products of the Information Economy can be produced this way: software, most information, most knowledge, a lot of computation, a lot of storage, a lot of connectivity. And that's quite significant. But it's not a threat to business as a broad category.

Q: Still, it sounds like peer production could be pretty disruptive to many existing businesses, since they exist largely to marshal people to produce things under one roof.

A: It's going to create a pressure for a lot of companies in this space to see how they coexist in this new ecology and how they take advantage of the productive energies and capabilities of this new player.

If you're in the business of making readymade barns, then a sudden influx of people doing barn-raising will kill your business. But if you're in the business of planks, hammers, trucking, it's actually not that bad at all. Or take the car and the horse-drawn carriage. There was a whole industry eliminated. But what about asphalt producers? What about suburban builders?

Q: What business models are emerging that leverage peer production?

A: The first is surfing, like Google surfs the collective judgments of lots and lots of people, or like IBM (IBM) surfs on Linux. The second is essentially toolmaking, like Second Life, a multiplayer online game environment, where 99% or so of the objects in the same have been produced by the users. Skype has another business model. It's built on untapped capacity in the economy, but it sells other things that allow us to connect into the public switched telephone network.

Q: Where might peer production go from here?

A: There's a possibility of using some of these insights for building distributed backup systems for data, like peer-to-peer networks. The basic idea is that these are fault-resistant backup systems. You could imagine banks having some kind of relationship with people who have accounts to create these kinds of distributed backup systems.

You could begin to imagine local governments using mesh networks built on top of Wi-Fi or next-generation wireless networks, to create robust emergency communications infrastructures. Connectivity in the last mile is co-produced by people basically handing messages that their neighbors are sending.

Q: Why is a law professor diving so deep into economics?

A: When you're looking at an area of radical technological, economic, and social transformation, we need to know what's happening in the social and economic domain, why it's happening in technological terms, and what are the technological possibilities. Only then can we understand that if we pressure this point with law or pressure that point with law, things will change in a way that is attractive or unattractive.

Q: What has been the reaction of traditional economists to your ideas?

A: I've found myself treated with a reasonable amount of respect among the people interested in open-source software. But it's an uncomfortable shoe for economists. Business-school economists, more than economics department economists, are interested in this. And more specifically, businesses are interested in this. EDITED BY Edited by Patricia O'Connell